WASHINGTON — The Bush administration capped the workweek Friday with additional unprecedented steps designed to stave off a potential Wall Street collapse that would have dramatic ramifications across the globe.
After the announcement Thursday night that it would work with Congress to create a mechanism for getting toxic loans off bank and financial firms' balance sheets, the Bush administration announced more measures to help investors and the troubled housing market.
- The Treasury Department tapped a New Deal-era tool, the Exchange Stabilization Fund, to provide $50 billion in insurance for investors who are in the $2 trillion money markets.
Money-market mutual funds are considered among the safest of investments, and many pension funds, which invest largely on behalf of ordinary Americans, are active in these markets. However, a big player in this market was unable to meet requests for redemptions Wednesday, and regulators feared the equivalent of a bank run on money-market funds.
So Treasury tapped a fund created in 1934 to bolster the U.S. dollar amid the Great Depression. This temporary effort will work like federal insurance on bank deposits, but will protect previously uninsured investments in money markets instead.
- The Federal Reserve announced that it's providing emergency loans to help commercial banks purchase asset-backed commercial paper from money markets. This move is important because it seeks to unfreeze the bank-to-bank lending that's vital for corporate America to fund its short-term cash-flow needs.
- The Securities and Exchange Commission announced a temporary ban, for 10 days but extendable another 30 days, on short sales of 799 financial stocks. Short selling is a common practice in which investors sell borrowed stock in hopes of a price decline and purchase it later for a profit. In recent days, banks and other finance companies complained that short sellers were helping to drive down their shares to bargain-basement prices.
"This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress," SEC Chairman Christopher Cox said in a statement Friday.
The SEC's move came a day after the Financial Services Authority, the United Kingdom's market regulator, banned short selling of financial stocks through January.
- Treasury and the Federal Housing Finance Administration will seek to grease the gears of mortgage lending by having Fannie and Freddie double, to $10 billion, the amount of mortgage-backed securities — mortgage bonds — that they can purchase. The government took over these companies Sept. 6, and they'll be crucial to ending the housing slump.
These actions capped a week that included the unprecedented $85 billion loan from the Federal Reserve to insurance giant American International Group on Tuesday night, a day after investment bank Lehman Brothers filed for bankruptcy and rival Merrill Lynch sold itself to Bank of America to avoid a similar fate.
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